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I am baffled at the Fed messaging. A year ago Powell's keynote said the inflation is a supply side problem due to "transitory" issues. How does raising interest

I am baffled at the Fed messaging. A year ago Powell's keynote said the inflation is a supply side problem due to "transitory" issues. How does raising interest rates with "demand destruction" help supply side inflation due to war and chip shortages?

skohan 4y ago
Well they may have believed (or hoped) at the time that inflation was transitory, and are now worried that it's more of a wage/price spiral.
- cronix 4y ago
  That's kind of laughable. Most people who know the very basics of economics knew this was coming after printing and dumping that much money into the economy early in the pandemic. They increased the supply of money with nothing of value backing it, which diluted the total supply's value.
  - dragontamer 4y ago
    Those guys have been calling for runaway inflation since 2011 though. So we ignore those permabears. Calling "inflation" for 10 years in a row is basically boy-who-cried wolf. No one believes you, and when you're finally "correct" about it, its not because you had any analysis, its because inflation inevitably occurs in a boom/bust cycle. Broken clock correct twice a day + Boy who cried wolf syndrome. I still won't be listening to the permabears / runaway inflation guys even with today's market conditions.
    - ejb999 4y ago
      Is the doctor who tells you for 30 years in a row that you should stop smoking because you will get lung cancer, only right in the year when you actually develop the cancer? Was the doctor 'crying wolf' for 29 years?
      - dragontamer 4y ago
        When the Fed printed a Trillion dollars in November 2008 through QE1, and those permabears think crazy hyperinflation will occur immediately, yes, we ignore them. When they say inflation will occur in QE2 in 2010, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them. When they say inflation will occur in QE3 in 2012, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them. When they say inflation will occur in QE4 in 2020, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them. Now its 2022, the Fed has been Quantitative Tightening for a year to deal with the inflation signals we're finally seeing. Hundreds of billions of dollars are being effectively destroyed by these policies. ------- So yes, the Fed is finally acting on the inflation issue. But only because the data shows it is finally a problem. We don't just take the permabear crowd word immediately, we move when the data shows an issue. Not before. There's some people who are just noise and are irrelevant to the discussion, unfortunately. You figure these things out over the years.
        candiodari 4y ago
        > We don't just take the permabear crowd word immediately, we move when the data shows an issue. Not before. Following the data means you're inevitably running after the facts. Running after the facts inevitably causes feedback loops. I'm sure those feedback loops were tuned correctly to not blow the whole thing up, right. Right? RIGHT?? Say ... what happened last time? Oh ... right.
        dragontamer 4y ago
        > Running after the facts inevitably causes feedback loops No? 2008 through 2014 had signs of deflation, so the Fed lowered rates and went into QE. 2022 has signs of inflation, so the Fed increased interest rates. Where is the feedback loop here?
      - smileysteve 4y ago
        It would be more appropriate to use something moderately healthy as opposed to "smoking". "Protein" might be a better metaphor. You need protein for cells to work, and you want to grow and grow strong. But most protein has some potential cancer or heart disease correlation.
    - smileysteve 4y ago
      It's kind of the opposite though. The fed ¡wanted! 2% inflation since 2008; even with covid fed policy, it took until spring 2022 to catch inflation up to the missed targets.
  - zthrowaway 4y ago
    Came here to say this. I’m still shocked how many people including on HN have been fooled by the politics around this. I guess it works.
  - colinmhayes 4y ago
    This just isn't true. https://www.igmchicago.org/surveys/inflation/ https://www.igmchicago.org/surveys/inflation/ is a poll of the top economists in the country and they certainly didn't all agree that the level of inflation we now see was a certainty.
- User23 4y ago
  Fortunately, we can rely on continued immigration to increase the labor supply and control wage inflation and that's a good thing. The price spiral with flat wages will result in a generally reduced quality of life for the American worker though. I think that's a bad thing, but nobody in power has cared about that for the past fifty years[1] so why start now? [1] https://economics.stackexchange.com/questions/15558/productivity-vs-real-earnings-in-the-us-what-happened-ca-1974 https://economics.stackexchange.com/questions/15558/producti...
randomdata 4y ago
It was believed that supply would return. It hasn't. Destroying demand means that you don't need supply to return.
staticman2 4y ago
A simple example: If your mortgage or credit cards debt or car loans cost more due to higher interest rates, you are going to have less money left over to purchase other products. This will make you less likely to want the new expensive Iphone, especially if you were going to finance the purchase, so as Iphone sales plumit, there will be less of a chip shortage since supply now meets demand.
- treis 4y ago
  Rate cuts don't just hit demand. They hit supply too and probably harder than they hit demand.
  - merpnderp 4y ago
    There is too much demand. If we could make all the stuff we can afford to buy, then we wouldn't have inflation. But it is how we get $12 for a medium #1 at Burger King, which is flipping insane.
- RspecMAuthortah 4y ago
  OK so what happens if the chip shortage lasts longer (due to war and commodity prices)and with plummeting sales and corporate earning (which will reduce tax receipts as well) the economy will enter recession? So then what is the game? Do Fed keep the economy in recession? Or do they start QE again?
  - dragontamer 4y ago
    > Or do they start QE again? Why would they start QE? Fed rate is at 4% right now, there's more than enough room to drop rates if an issue occurs. Given the data however, its unlikely to happen. We're currently at record employment levels. The expectation is for the rate to keep going up to maybe 4.5% next year, and finally that's when inflation is quelled, and we taper off rates sometime next year. Of course, we need to keep up with economic data and see if these rate hikes have the desired effects.
    - 4y ago
queuebert 4y ago
The inflation isn't due to war and chip shortages.
- themitigating 4y ago
  Care to elaborate and provide evidence?
  - muzika 4y ago
    No need to provide evidence for something that is obvious.
NotYourLawyer 4y ago
Spoiler alert, the “transitory” stuff was always bullshit and everyone knew it.
spaetzleesser 4y ago
" A year ago Powell's keynote said the inflation is a supply side problem due to "transitory" issues." This reminds me a lot of the 2008 crisis when Bernanke told us that everything was just fine until banks started collapsing. Personally I think the Fed has turned into a political institution that keeps inflating bubbles until there is no way out. I can't see much wisdom or foresight in their moves. They seem constantly behind the curve and instead of smoothing out business cycles they make them more extreme.
- Loughla 4y ago
  I want someone to prove you wrong, because I am right there with you. It seems like the swings just get wilder and wilder, and no one is at the helm. Please someone tell me why this is incorrect.
  - abakker 4y ago
    There have been very few “swings” at all. This response is case in point for “so measured it is probably not enough”. Policy has been incredibly stable in the last decade, and then we had a crazy pandemic and the fiscal policy response, in hindsight, was wrong.
    - nwienert 4y ago
      A ton of people called it as it was happening
    - klooney 4y ago
      I don't even think it was wrong, it just went on too long. The US had an excellent recovery, but because Congress didn't want to pass automatic stabilizers, and they had a hard time passing laws, they set long expiration times- and the last stimulus bill went on too long in retrospect.

skohan 4y ago

Well they may have believed (or hoped) at the time that inflation was transitory, and are now worried that it's more of a wage/price spiral.

cronix 4y ago
That's kind of laughable. Most people who know the very basics of economics knew this was coming after printing and dumping that much money into the economy early in the pandemic. They increased the supply of money with nothing of value backing it, which diluted the total supply's value.
- dragontamer 4y ago
  Those guys have been calling for runaway inflation since 2011 though. So we ignore those permabears. Calling "inflation" for 10 years in a row is basically boy-who-cried wolf. No one believes you, and when you're finally "correct" about it, its not because you had any analysis, its because inflation inevitably occurs in a boom/bust cycle. Broken clock correct twice a day + Boy who cried wolf syndrome. I still won't be listening to the permabears / runaway inflation guys even with today's market conditions.
  - ejb999 4y ago
    Is the doctor who tells you for 30 years in a row that you should stop smoking because you will get lung cancer, only right in the year when you actually develop the cancer? Was the doctor 'crying wolf' for 29 years?
    - dragontamer 4y ago
      When the Fed printed a Trillion dollars in November 2008 through QE1, and those permabears think crazy hyperinflation will occur immediately, yes, we ignore them. When they say inflation will occur in QE2 in 2010, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them. When they say inflation will occur in QE3 in 2012, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them. When they say inflation will occur in QE4 in 2020, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them. Now its 2022, the Fed has been Quantitative Tightening for a year to deal with the inflation signals we're finally seeing. Hundreds of billions of dollars are being effectively destroyed by these policies. ------- So yes, the Fed is finally acting on the inflation issue. But only because the data shows it is finally a problem. We don't just take the permabear crowd word immediately, we move when the data shows an issue. Not before. There's some people who are just noise and are irrelevant to the discussion, unfortunately. You figure these things out over the years.
      - candiodari 4y ago
        > We don't just take the permabear crowd word immediately, we move when the data shows an issue. Not before. Following the data means you're inevitably running after the facts. Running after the facts inevitably causes feedback loops. I'm sure those feedback loops were tuned correctly to not blow the whole thing up, right. Right? RIGHT?? Say ... what happened last time? Oh ... right.
        dragontamer 4y ago
        > Running after the facts inevitably causes feedback loops No? 2008 through 2014 had signs of deflation, so the Fed lowered rates and went into QE. 2022 has signs of inflation, so the Fed increased interest rates. Where is the feedback loop here?
    - smileysteve 4y ago
      It would be more appropriate to use something moderately healthy as opposed to "smoking". "Protein" might be a better metaphor. You need protein for cells to work, and you want to grow and grow strong. But most protein has some potential cancer or heart disease correlation.
  - smileysteve 4y ago
    It's kind of the opposite though. The fed ¡wanted! 2% inflation since 2008; even with covid fed policy, it took until spring 2022 to catch inflation up to the missed targets.
- zthrowaway 4y ago
  Came here to say this. I’m still shocked how many people including on HN have been fooled by the politics around this. I guess it works.
- colinmhayes 4y ago
  This just isn't true. https://www.igmchicago.org/surveys/inflation/ https://www.igmchicago.org/surveys/inflation/ is a poll of the top economists in the country and they certainly didn't all agree that the level of inflation we now see was a certainty.
User23 4y ago
Fortunately, we can rely on continued immigration to increase the labor supply and control wage inflation and that's a good thing. The price spiral with flat wages will result in a generally reduced quality of life for the American worker though. I think that's a bad thing, but nobody in power has cared about that for the past fifty years[1] so why start now? [1] https://economics.stackexchange.com/questions/15558/productivity-vs-real-earnings-in-the-us-what-happened-ca-1974 https://economics.stackexchange.com/questions/15558/producti...

randomdata 4y ago

It was believed that supply would return. It hasn't. Destroying demand means that you don't need supply to return.

staticman2 4y ago

A simple example: If your mortgage or credit cards debt or car loans cost more due to higher interest rates, you are going to have less money left over to purchase other products. This will make you less likely to want the new expensive Iphone, especially if you were going to finance the purchase, so as Iphone sales plumit, there will be less of a chip shortage since supply now meets demand.

treis 4y ago
Rate cuts don't just hit demand. They hit supply too and probably harder than they hit demand.
- merpnderp 4y ago
  There is too much demand. If we could make all the stuff we can afford to buy, then we wouldn't have inflation. But it is how we get $12 for a medium #1 at Burger King, which is flipping insane.
RspecMAuthortah 4y ago
OK so what happens if the chip shortage lasts longer (due to war and commodity prices)and with plummeting sales and corporate earning (which will reduce tax receipts as well) the economy will enter recession? So then what is the game? Do Fed keep the economy in recession? Or do they start QE again?
- dragontamer 4y ago
  > Or do they start QE again? Why would they start QE? Fed rate is at 4% right now, there's more than enough room to drop rates if an issue occurs. Given the data however, its unlikely to happen. We're currently at record employment levels. The expectation is for the rate to keep going up to maybe 4.5% next year, and finally that's when inflation is quelled, and we taper off rates sometime next year. Of course, we need to keep up with economic data and see if these rate hikes have the desired effects.
  - 4y ago

queuebert 4y ago

The inflation isn't due to war and chip shortages.

themitigating 4y ago
Care to elaborate and provide evidence?
- muzika 4y ago
  No need to provide evidence for something that is obvious.

NotYourLawyer 4y ago

Spoiler alert, the “transitory” stuff was always bullshit and everyone knew it.

spaetzleesser 4y ago

" A year ago Powell's keynote said the inflation is a supply side problem due to "transitory" issues." This reminds me a lot of the 2008 crisis when Bernanke told us that everything was just fine until banks started collapsing. Personally I think the Fed has turned into a political institution that keeps inflating bubbles until there is no way out. I can't see much wisdom or foresight in their moves. They seem constantly behind the curve and instead of smoothing out business cycles they make them more extreme.

Loughla 4y ago
I want someone to prove you wrong, because I am right there with you. It seems like the swings just get wilder and wilder, and no one is at the helm. Please someone tell me why this is incorrect.
- abakker 4y ago
  There have been very few “swings” at all. This response is case in point for “so measured it is probably not enough”. Policy has been incredibly stable in the last decade, and then we had a crazy pandemic and the fiscal policy response, in hindsight, was wrong.
  - nwienert 4y ago
    A ton of people called it as it was happening
  - klooney 4y ago
    I don't even think it was wrong, it just went on too long. The US had an excellent recovery, but because Congress didn't want to pass automatic stabilizers, and they had a hard time passing laws, they set long expiration times- and the last stimulus bill went on too long in retrospect.